PIERRE, S.D. – The South Dakota Public Utilities Commission today approved a 12.7 percent increase in electric rates for retail customers of Black Hills Power. The increase represents about $17 million less in annual revenues than the company requested. The commission voted at the end of a three-day hearing held to consider a settlement agreement between commission staff and Black Hills Power.

As a result of the settlement, customer bills will reflect a 19.4 percent increase, which includes the permanent rate increase of 12.7 percent plus a temporary 6.7 percent increase related to the energy cost adjustment. Black Hills Power is permitted by law to implement an annual energy cost adjustment, which it did on March 1, 2010, to recover the cost of fuel and purchased power. By March 1, 2011, the energy cost adjustment is expected to decrease, reflecting the permanent rate increase of 12.7 percent. The company asked for a permanent increase of 26.6 percent.

"Consumers told us that a request for a 26.6 percent increase demanded substantial scrutiny," said PUC Chairman Dusty Johnson. "They were right. After nine months of digging, analyzing and negotiating, we've approved this settlement, which excludes $17 million in annual costs ratepayers shouldn't have to pay for," he stated.

Black Hills Power requested a 9.27 percent rate of return on rate base, which the settlement reduced to 8.26 percent. Additionally, 100 percent of economic development costs, 98 percent of advertising costs and 100 percent of financial-based incentive compensation were excluded from rates. The incentive compensation adjustments alone had an impact of more than $800,000 a year.

Two key components of the settlement will combine to return at least $12.75 million to ratepayers over the next three years. First, because of concerns about the timing of the construction of the Wygen III power plant, Black Hills Power is required under the settlement to flow back to consumers almost $7 million during the next three years until Wygen III is expected to be needed to serve retail loads alone. Second, the first 65 cents of every dollar Black Hills Power earns by selling power into the wholesale market will flow back to ratepayers. Even if Black Hills Power receives no income from such sales, ratepayers will still receive a minimum credit of $2 million every year this rate is in effect. See sidebar for a list of additional items that were reduced or eliminated from the rate increase.

"I am confident the PUC did its duty in this very complicated rate case," said PUC Vice Chairman Steve Kolbeck. "Staff conducted an extensive, exhaustive analysis to arrive at a comprehensive settlement where, I believe, the interests of the ratepayer are the centerpiece," he said.

PUC Commissioner Gary Hanson stated: "Surprisingly, even the evidence from the opponent's witness supported the company's decision to build the Wygen lll plant and actually corroborated the return on equity percentage agreed to by PUC staff and Black Hills Power. Without the additional capacity, Black Hills Power would not have the long-term ability to provide reliable and economical electric service," he said.

Black Hills Power filed an application with the PUC on Sept. 30, 2009, requesting to increase rates by approximately $32 million annually or 26.6 percent based on the company's test year ending June 30, 2009. PUC staff and Black Hills Power reached a settlement agreement on May 14, 2010.

A group of intervenors collectively known as the Residential Consumers Coalition participated in the hearing to oppose the settlement. A second group, the Black Hills Industrial Intervenors, reached a separate settlement with Black Hills Power that was approved by the commission on June 10, 2010.

Because Black Hills Power has had an interim rate increase in effect since April 1, 2010, that is higher than the rate approved by the commission, customers can expect to receive a modest refund. The adjustment will be made to customer billings beginning this month.

A PUC staff team of one attorney and five analysts logged more than 2,600 hours reviewing documents, requesting additional information, conducting meetings and analyzing data. The staff team was assisted by two specialized consulting firms. The analysis included a review of Black Hills Power's integrated resource plan, submitted separately from the company's rate increase application. The plan described the company's course for meeting the future electricity demands of its customers and the resources it intends to use.

The Black Hills Power rate case generated considerable public attention. The PUC held four public input meetings at which the commissioners listened to ratepayer concerns and addressed questions about the PUC's authority and the rate case process. Additionally, more than 200 written and verbal comments regarding the case were submitted to the PUC office.

This is the second rate increase for Black Hills Power since 1995. The company's last increase of 7.8 percent occurred in 2007. The settlement agreement approved by the PUC prohibits the company from requesting another rate increase before April 2013. The commission amended the settlement to require Black Hills Power submit a report with its next rate increase application that describes the company's energy efficiency and demand-side management efforts and the results of those efforts.

Black Hills Power Rate Case Settlement Adjustments
The South Dakota Public Utilities Commission approved a settlement agreement to allow Black Hills Power to increase electric rates for retail customers by 12.7 percent. The company sought a 26.6 percent increase. The settlement included more than 50 adjustments to the company's original request. The adjustments represent about $17 million less in annual revenues than the company requested. Following is a partial list of the reductions. For ease of review, these figures have been converted to operating income amounts by major category.